Bank Opacity and Uninsured Depositor Monitoring

This paper examines whether bank financial reporting opacity increases agency cost between bank managers and uninsured depositors. In particular, following calls from prior research, I investigate the effects of reporting opacity on this critical source of bank financing, which represents over $5 trillion at 2019. Using quarterly regulatory filings of federally-insured US commercial banks, I confirm a predicted negative association between uninsured deposits and larger delays in expected loss recognition, my proxy for reporting opacity. I also document expected cross-sectional variation, with this negative association accentuated for banks that are not too-big-to-fail (as these lack the implicit government guarantees of too-big-to-fail banks), and some evidence for banks that are not publicly-traded (which have lower overall reporting and disclosure quality relative to publicly-traded banks). The results are consistent with monitoring by uninsured depositors, such that stronger reporting transparency enables banks to attract higher levels of uninsured deposits.